gold standard#3:devalue,print-money,export..

Every functioning economy needs to Print money, basically creating more paks out of thin air, assuming your currency is the “pak”. It becomes a problem only when we print too much. But too much compared to …. To the amount of export earning and your “gold” reserve.

Initially, each pak is backed by a microgram of gold. Assume our country has no gold mine, so when you print 5% more packs, you need to “earn” 5% more gold by exporting. If you earn less, and print more, then it’s no longer possible for every pak in circulation to be backed by a microgram of gold. The pak would devalue against gold.

According to P359 CFA Econ textbook, Each pak paper note or coin is officially and legally a claim on the “gold” (i.e. the foreign reserve of gold and hard currencies) of the pak issuer i.e. the central bank. No one else can print paper pak notes. Initially, a pak holder has the right to convert his pak into gold. Such paper money is called convertible paper money.

I think SGD is backed by  a basket of hard currencies – the modern-day equivalent of gold. Every SGD ever “printed” is (not strictly) backed by some amount of “gold” earned from export. Singapore government doesn’t print SGD to solve her own debt problems. Singapore government probably doesn’t need to, thanks to good revenue. Tax revenue is a major component but tax is relatively low in Singapore. I guess revenue also comes from (partially) state-owned companies[1], land sales and sovereign fund investment returns.

[1] I don’t totally agree, but many Singapore residents say that hospitals, residential parking lots, telephone, water, power, gas supplies are all run by state-owned but privatized companies that are profit driven. Some of the largest property developers and largest banks are partially state-owned too.

In the case of Fed reserve bank, the “gold” asset you can claim on consists of
1) real gold
2) basket of hard currencies
3) US gov bonds — biggest component

The fed prints paper money according to the total quantity of these “gold” assets. If too much paper money printed, then the dollar devalues against 1 and 2.

Bear in mind anyone can hold  US gov bonds, but Fed holds so much of it that it is the basis of most of the USD paper money in circulation. Suppose the total USD in circulation is 900 tn. When US government issues 100 tn of bonds, Fed’s reserve would increase by that amount and Fed can print that much USD. However, is the additional quantity of USD ultimately backed by gold? No. I think that’s why USD would weaken against gold.

Once again, I feel gold standard is simplifying assumption. We just need to know when it stops being simplifying and becomes simplistic.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s